Tuesday, December 18, 2012

Explaining the "Social Security Cut" in 30 seconds

If we used Chained-CPI for the last 12 years, the average payout would be about $600 less a year.

The Social Security payout increases each year in order to adjust for inflation. The intent is to keep the benefit level the same year in and year out. The issue being discussed is which method to calculate inflation is proper.

The current law uses the Consumer Price Index (CPI). This method uses the same basket of goods over several years to see how prices change. A gallon of gas this year versus last year. A gallon of 2 percent milk this year than last year.

The proposal asks to change the law to use Chained-CPI instead from now on, which adjusts for consumers' actual change in behavior in accordance with price. If two percent milk becomes relatively more expensive then skim, then people buy skim milk instead. This gets even more complicated when introducing buying habits on new technology. Economists tend to, but far from a consensus, endorse this method.

The basic point is that people do not buy the same goods every year in the same quantities, therefore it makes little sense to increase benefits every year as if they are. No one is proposing decreasing benefit levels. Only that benefit levels do not grow further because of an antiquated formula.

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